Policy responses and paperless trade – how the trade finance industry has reacted to COVID-19

July 2020  |  SPOTLIGHT  |  GLOBAL TRADE

Financier Worldwide Magazine

July 2020 Issue


The COVID-19 pandemic has caused widespread economic and social shocks – with the full extent of its impact still yet to be seen. Nationwide lockdowns and border closures have forced many businesses to shut or significantly rethink their ways of doing business, with the unprecedented impact of the crisis being felt across all industries, and by companies of all sizes.

This is no different for the global trade business. COVID-19 has disrupted supply chains worldwide, with importers and exporters alike facing numerous challenges in keeping their businesses running. According to recent figures from the International Chamber of Commerce (ICC) Trade Register, the value of global trade could decline anywhere between 11 percent and 30 percent in 2020.

Trade finance products help fund much of the activity in global trade, providing liquidity and risk mitigation solutions to importers and exporters. However, this sector has been traditionally based on the use and exchange of physical documents. And, while progress has been made in recent years, action is now urgently required to help digitalise processes to continue providing vital financing to companies worldwide, especially to micro, small and medium enterprises (MSMEs).

In the face of such an unprecedented crisis, it is not a surprise to see the wheels of global trade turn more slowly. However, it is crucial that they do not stop completely. This requires the attention of organisations beyond the trade finance industry alone. How have global institutions, governmental and regulatory bodies reacted? With the imperative of securing supply chains – especially for medical and other essential goods – a number of measures have been put in place to support, both directly and indirectly, the continued supply of funding for trade.

Economic stimulus and capital relief

While not trade-specific, governments and regulatory institutions have been increasing their stimulus measures to safeguard the banking system during these turbulent months.

One of the biggest announcements following the onset of the COVID-19 pandemic has come from the Basel Committee on Banking Supervision (BCBS). The BCBS oversees the prudential regulation of the banking industry, setting out regulatory recommendations for governments and supranational institutions to implement, with the aim of ensuring the stability of the financial system.

In March, the BCBS announced the deferral of Basel III implementation. With this delay, banks will have additional resources to commit to mitigating the unprecedented impact of COVID-19, supporting businesses and the wider economy.

At a country level, meanwhile, governments are also taking steps to shore up financial markets. Notably, the US Federal Reserve has broadened its swap lines to a range of countries, including large emerging markets, the European Central Bank, Bank of England and Bank of Japan.

The COVID-19 outbreak has sent the US dollar sharply higher, leading to frenzied demand from global financial institutions to buy the currency. In turn, these facilities will help ease the strain on global dollar funding markets.

While neither of these steps are directly related to trade finance, by helping to ensure the financial stability and increased availability of bank funding, these measures play an important role in supporting trade flows.

Targeted support for trade finance

In addition to wider support for the banking system, specific measures have also been proposed to directly target the trade finance industry.

At the latest B20 meeting, members issued a Statement on Finance and Trade urging a global action plan to limit the impact of the virus on the economy. This sets out a series of recommendations to support trade and trade finance, and to tackle the unfolding economic crisis.

In the European Union (EU), export credit agencies (ECA) have been encouraged, and are providing support for, short-term transactions. Drastic measures have been implemented to ensure businesses still have access to vital trade finance and can continue exporting goods.

This notably includes Polish ECA Kuke announcing it would take on 100 percent of both commercial and political risk from exporters and banks financing or refinancing export transactions. The policy applies to all new export projects with repayment terms of two years or more and will last at least until the end of 2020. Elsewhere, Spanish ECA Cesce is providing a new revolving credit line for SMEs of up to €2bn and, in France, ECA Bpifrance is collaborating with the banking sector to offer state-guaranteed loans worth a total of €300bn.

Wider regional stimulus packages have also been made available from multilateral development banks. Notably, the European Bank for Reconstruction and Development unveiled an initial €1bn financial package to help countries in its region to cope with the impact of the virus outbreak. In Asia, the Asian Development Bank has tripled its available funding to manage the impact of COVID-19 to $20bn.

Challenges remain for paperless trade

These are all encouraging signs, but several key measures are still needed. Crucially, without digital processes and documents, the ability to provide trade finance remains a challenge, as in-person contact, travel and shipping have all been heavily impacted by the restrictions imposed from efforts to limit COVID-19 transmission.

At the ICC, this has been at the forefront of concerns. So, to assist with trade transactions subject to traditional ICC rules, the ICC has released a guidance document on their adaptation in certain circumstances, providing a certain amount of flexibility and room for adaptation, considering current events. Reviewing provisions for a range of rules, the technical advice does not pronounce whether COVID-19 can be considered a force majeure, but it does provide indications on the factors which may be relevant in arriving at such a conclusion.

Furthermore, in April, the ICC released a memo urging governments and regulators to void any legal prohibitions on the use of electronic trade finance documents and adopt the UNCITRAL Model Law on Electronic Transferable Records, which provides a robust legal framework for the use of electronic trade documents, both domestically and across borders. In many jurisdictions, the legal status of electronic documents remains unclear, or they are simply prohibited. With many banks unable to handle documentation in person due to the ongoing COVID-19 pandemic, this is something that must be urgently addressed.

Banks are adapting to these unprecedented circumstances. In turn, the ICC has also published a series of rapid response measures for banks to keep trade finance flowing. With data from the ICC, the International Trade and Forfaiting Association (ITFA) and the Bankers Association for Finance and Trade (BAFT), the ICC’s Digitalisation Working Group has collated ad hoc best practices being implemented by banks worldwide as they seek to overcome the challenge of maintaining trade flows when paper-based transactions are difficult or impossible due to reduced physical interactions.

Most at risk

The availability of trade finance is especially important for MSMEs, particularly those in higher risk regions, which are most likely to see their financing demands rejected. And this is likely to be exacerbated by COVID-19. MSMEs make up 90 percent of companies across the globe and more than 50 percent of the world’s total employment. As such they are both heavily exposed to the disruption and critical to the recovery.

Advances in technology have already helped banks reduce risks involved in supplying trade finance, in turn increasing availability to MSMEs. With greater availability of data, banks can enhance credit assessments, and technology can also be used to improve the speed and accuracy of anti-money laundering (AML) and know your customer (KYC) procedures.

However, it is crucial that governments, regulators and finance providers work together to enable MSME participation in global trade, to limit economic losses, protect jobs and set strong foundations for renewed economic growth.

The road ahead

The shift to digital advocated in this article is, of course, not without its own unique challenges, with a host of new operational risks that need to be considered – including system failures, cyber security or false negatives from machine learning models. However, the transition will also help drive efficiency in the long term and increase the availability of trade finance to those that need it most.

Since 2000, global trade flows have trebled, rising from $6.2 trillion to $18.1 trillion in 2019. This would not have been possible without the underlying flow of trade finance. The outbreak of COVID-19 has now put this – as well as the wider global financial and banking ecosystem – under strain. Working together with governments and regulators will be key to overcoming the consequences of the outbreak, through economic stimulus and new protocols.

The ICC, as a leading voice in the trade finance industry, stands ready to work with governments and businesses to help resolve the crisis at hand and rebuild for the future.

Olivier Paul is director of finance for development at the International Chamber of Commerce (ICC). He can be contacted on +33 (0)1 49 53 28 80 or by email: olivier.paul@iccwbo.org.

© Financier Worldwide


BY

Olivier Paul

International Chamber of Commerce (ICC)


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